The outlook for fixed-income investing has changed radically in a very brief time. After years with their foot to the floor with expansionary monetary policies, zero policy rates, and quantitative easing, the central banks have now hit the brakes and shifted to more restrictive policies.
The surprisingly resistant inflationary spiral has led the central banks to revise their monetary policies and raise their policy rates time and again. The Fed has raised rates by 500 bps to 5.25% since March 2022, and the ECB has raised its rates by 375 bps to 3.75% since July 2022.
These rate hikes and inflation have pushed debt yields upwards, causing values to fall. Bond prices have fallen off sharply, the most severe correction in the last 50 years. The most sensitive assets (e.g., sovereign debt) have undergone the steepest declines. On average, sovereign bonds have dropped by -18% in Europe and -13% in the U.S.
These lower values have also had an effect on corporate credit, already subject to very tight spreads and highly sensitive to interest rate shifts. Corporate bond spreads grew, leading to large price corrections of more than -10%.
As a result, most fixed-income funds closed out 2022 with losses. EDM Renta, our very short-term fixed-income fund, was one of the few exceptions, ending the year with positive returns and placing second in the ranking for its category.
The sharp correction in 2022, while painful, did help stabilise interest rate levels to some extent. This has resulted in an opportunity for more conservative investors, who now have profitable options for their investments.
EDM has two fixed-income funds which by their nature are ideal for more conservative investors in the current market conditions.
Our very short-term fund, EDM Renta, offers attractive returns with very low interest rate risk and very low volatility. It benefits from the higher returns currently offered by the front end of the curve.
EDM Ahorro is the second fund. It has a conservative profile and is flexibly managed. The fund's portfolio is kept aligned with the various environments through active management of the term, corporate credit, sovereign debt, exposure to different geographical risks, and different fixed-income niches.
The fund's flexible nature makes it possible to put together a better portfolio in response to different market scenarios. We have used this to take advantage of the good behaviour of high-yield credit through some profit-taking and increasing the share of sovereign debt and high-quality companies now that interest rates are rising.
While interest rates have been the main fixed-income risk over the past year, credit risk could very well be the main risk in the second half of this year. The central banks' more restrictive monetary policies should cool down economic growth, which could in turn result in a certain uptick in default rates and more volatile credit.
With this in mind, we have taken a defensive position for the fund in respect of both credit and term. The fund has very short-term liquid assets, allowing us to take advantage of opportunities that arise from corporate credit and sovereign debt corrections. The EDM Ahorro fund currently offers an extremely attractive average return. We therefore view it as a good option for conservative investors in today's uncertain environment.
Active term management has been a key factor in boosting the EDM Ahorro fund to the top of the ranking chart for its category and in continuously earning the highest scores from the leading investment fund rating firm.
Karina Sirkia,
Fixed Income Fund Manager
